My PCs in my current game passed through there, as a flavorful place to visit. Don't think I'd want to set a long term game there.

Some of the feel/features of a city on a volcanic crater might be found in Shackled City.

The forbidden city is a built in dungeon crawl environment for enterprising PCs, especially if they break through to a new section. You could use any of a number of catacomb/undercity modules. Lost city of Barakus, maybe?

If you really want to play up the necromancer PC feel, Liches by Bottle Imp (3e d20 supplement) or Green Ronin's Secret College of Necromancy might have some worthwhile material for you.

Hollowfaust is among my favorite Scarred lands products. As presented there is certainly enough flavor to make it feel "alive" as it were. I dropped the city into the setting I use at home and ran it as the home base for my PCs and it was amazing.

1) I can't say what other SL products would work well with the city since I did not use it in a SL game. Sorry. If I had to guess, anything to do with the desert will be helpful, as that's a primary driver of conflict for the region. The Forests where Mormo died(to the north) would also be helpful to have more knowledge of for an in-setting game. Otherwise, the city itself is actually quite isolated from the rest of the setting so you do not actually need all that much to make it work.

2) For expanding the area, I looked at ghostwalk, Libris Mortis, and the Expedition to castle Ravenloft super-module. Nothing got directly ported, but there is a LOT in those that you can pull from to expand the flavor of the region. That Knight PrC from ravenloft, with some tweaking, was especially awesome. I turned them into an elite order of knights intent on clearing the ruined sections of the city and also hunting down intelligent undead. Remember: the necromancer DO NOT DO intelligent undead.

3) The city has a lot to do. Clearing the ruins, room for a ton of intrigue between the guilds. My campaign was actually focused on a group of insurgents who wanted the necromancers out of power so they could establish a democracy. The driving conflict there came from the annual festival where the necros would come out of the volcano to find new students. PCs originally got hired to hide a kid from the necros, thus kicking off a lot of the story. There's also lots of room for dungeon adventures under the city, and significant adventure in the desert. Ever see "The mummy?" In my game, there was a whole civilisation that got swallowed by the sands. Lots of stuff happening there, with "the book of the dead" being sort of a sub-plot thing wherein the necros wanted it because they were afraid the bonewrack would break free from there control. Necromancer players will definitely have lots to do, but the city has so much going on that you could conceivably run an entire game without ever seeing a single necromancer.

The big thing about the city is that the Necromancers rule the city, but it's reluctant. They care primarily because they want to do their work in peace. In general, while it's a lawful city, it is also a capitalist paradise. Very few rules and regulations on business, tons of room for organized crime to take shape, and free labor for city projects. They also dislike intelligent undead immensely, especially Liches. Read over the stuff about their views concerning immortality. It shapes a lot of the character of the city.